Impact of Credit Default Swaps on Firms’ Operational Efficiency

Liangfei Qiu; Ruiqi Liu; Yong Jin; Chao Ding; Yangyang Fan; Andy Yeung

doi:10.1111/poms.13788

Impact of Credit Default Swaps on Firms’ Operational Efficiency

Liangfei Qiu, Ruiqi Liu, Yong Jin, Chao Ding, Yangyang Fan, Andy Yeung

Research output: Contribution to journal › Article › peer-review

18 Citations (Scopus)

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Abstract

As one of the most important financial innovations in the last two decades, credit default swap (CDS) contracts have been initiated and actively traded in the market to hedge against credit risks. However, little is known about how these financial innovations affect an underlying firm’s operations. In this empirical study, we find that an underlying firm’s operational efficiency is significantly improved with the inception of CDS trading. Our results are robust to multiple causal identification strategies. Further analysis suggests that the inception of CDS tends to enhance the operational efficiency of a firm through the supply chain financing capability and trade credit. We also postulate that CDS leads to enhanced efficiency through institutional monitoring and improvements in management effectiveness. We then obtain suggestive evidence. Our findings have direct implications concerning the ongoing policy debate surrounding CDS. We contribute to operations management research by exploring how innovations in the financial market would, in turn, affect the operational performance of firms.

Original language	English
Pages (from-to)	3611-3631
Number of pages	21
Journal	Production and Operations Management
Volume	31
Issue number	9
Early online date	26 Jun 2022
DOIs	https://doi.org/10.1111/poms.13788
Publication status	Published (in print/issue) - 6 Sept 2022

Bibliographical note

Funding Information:
The authors thank the department editor, the senior editor, and three anonymous reviewers for their valuable suggestions that have significantly improved this study. The work described in this paper was substantially supported by the funding for Projects of Strategic Importance of The Hong Kong Polytechnic University (Project Code: 1‐ZE2D). Ruiqi Liu and Yong Jin acknowledge the support from the Center for Economic Sustainability and Entrepreneurial Finance (CESEF), PolyU AF. Yangyang Fan acknowledges the General Research Fund from the Research Grants Council of Hong Kong (Project No. 15508219). Andy Yeung was supported in part by PolyU's research fund 99QP. Ruiqi Liu and Yong Jin are the corresponding authors of the article.

Publisher Copyright:
© 2022 Production and Operations Management Society.

Funding

Funding Information: The authors thank the department editor, the senior editor, and three anonymous reviewers for their valuable suggestions that have significantly improved this study. The work described in this paper was substantially supported by the funding for Projects of Strategic Importance of The Hong Kong Polytechnic University (Project Code: 1‐ZE2D). Ruiqi Liu and Yong Jin acknowledge the support from the Center for Economic Sustainability and Entrepreneurial Finance (CESEF), PolyU AF. Yangyang Fan acknowledges the General Research Fund from the Research Grants Council of Hong Kong (Project No. 15508219). Andy Yeung was supported in part by PolyU's research fund 99QP. Ruiqi Liu and Yong Jin are the corresponding authors of the article. Publisher Copyright: © 2022 Production and Operations Management Society.

Keywords

Financial Innovations
Credit Default Swaps
operational efficiency
Supply Chain Finance
Institutional Monitoring

UN SDGs

This output contributes to the following UN Sustainable Development Goals (SDGs)

Access to Document

10.1111/poms.13788

Impact of Credit Default Accepted ManuscriptAuthor Accepted Manuscript, 756 KB

Cite this

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title = "Impact of Credit Default Swaps on Firms{\textquoteright} Operational Efficiency",

abstract = "As one of the most important financial innovations in the last two decades, credit default swap (CDS) contracts have been initiated and actively traded in the market to hedge against credit risks. However, little is known about how these financial innovations affect an underlying firm{\textquoteright}s operations. In this empirical study, we find that an underlying firm{\textquoteright}s operational efficiency is significantly improved with the inception of CDS trading. Our results are robust to multiple causal identification strategies. Further analysis suggests that the inception of CDS tends to enhance the operational efficiency of a firm through the supply chain financing capability and trade credit. We also postulate that CDS leads to enhanced efficiency through institutional monitoring and improvements in management effectiveness. We then obtain suggestive evidence. Our findings have direct implications concerning the ongoing policy debate surrounding CDS. We contribute to operations management research by exploring how innovations in the financial market would, in turn, affect the operational performance of firms.",

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N2 - As one of the most important financial innovations in the last two decades, credit default swap (CDS) contracts have been initiated and actively traded in the market to hedge against credit risks. However, little is known about how these financial innovations affect an underlying firm’s operations. In this empirical study, we find that an underlying firm’s operational efficiency is significantly improved with the inception of CDS trading. Our results are robust to multiple causal identification strategies. Further analysis suggests that the inception of CDS tends to enhance the operational efficiency of a firm through the supply chain financing capability and trade credit. We also postulate that CDS leads to enhanced efficiency through institutional monitoring and improvements in management effectiveness. We then obtain suggestive evidence. Our findings have direct implications concerning the ongoing policy debate surrounding CDS. We contribute to operations management research by exploring how innovations in the financial market would, in turn, affect the operational performance of firms.

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Impact of Credit Default Swaps on Firms’ Operational Efficiency

Abstract

Bibliographical note

Funding

Keywords

UN SDGs

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